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The failure of interventionism

By Justin Jefferson - posted Thursday, 30 April 2009


Thus government’s “economic management” of the money supply forcibly imposes on society not one but two vast Ponzi schemes of fake money piled one on top of the other - and all in the name of economic “stabilisation”.

You wouldn’t let someone take as much money from your bank account as they want without your knowledge or consent, would you? Well there is no more reason to trust government with control of the money supply in general.

It may be thought that this power to re-distribute wealth by printing money is a useful instrument of social justice. But in practice it is used to exploit the poor, the workers, the financially unsophisticated, the fixed-income middle class, and savers. It most favours the financially sophisticated, banks, politicians, real estate speculators, and many other vested interests in political favouritism. It is ironical that those most professing concern for social justice are the first to assume the innocence and usefulness of this anti-social and unjust arrangement.

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Austrian theory of the trade cycle

Money is not the same as wealth. If we doubled the amount of money in the economy overnight, we would not be twice as rich. The underlying real wealth would be the same.

Increasing the money supply starts the boom in the sector where the new money enters the economy. Those receiving the new money bid up prices.

Inflation falsifies the means of economic calculation - prices. It sends signals to entrepreneurs that there is a demand for real goods, when in fact the demand is fake - just a bubble of extra paper money. Inflation sends signals that there is much more real capital available than in fact there is.

As a result, entrepreneurs begin projects that cannot be completed having regard to the amount of real capital available. Now the whole point of being economical is to use resources to satisfy the needs and wants that the consumers consider most urgent. But inflation misrepresents people’s preferences. Capital and labour flow into the activities demanded with the new money, creating a “bubble”. As a result, an enormous amount of the people’s real capital is mal-invested.

Eventually, something has to give. The real capital is not enough to satisfy both the real underlying demand, and the fake demand set off by the excess money substitutes. The boom must collapse. Either the lenders realise that the loans can’t be re-paid and stop lending. Or the inflation accelerates and threatens the total breakdown of the function of money as a medium of exchange: like Weimar Germany, or Zimbabwe, or the way Obama is heading.

As Warren Buffett said, “When the tide goes out, you can see who’s swimming naked”. The recession is the process by which the market reveals which businesses are servicing the real demand, and which are servicing the fake demand originating in government’s manipulation of the money supply. The recession is the process by which the mass of ordinary people reject government’s over-valued paper money and re-assert their own valuations as against the central bankers.

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Actions speak louder than words. Every act of buying, or abstaining from buying, is a vote in the market democracy. The sovereignty of the mass of people as consumers thus re-directs the allocation of capital. Entrepreneurs must liquidate capital that has been mal-invested and re-allocate it to productive purposes in real demand. If they don’t, they go broke, and their property passes into the hands of entrepreneurs who will supply what the consumers consider most urgent.

Some capital - such as petrol - can easily be re-allocated to different uses. But much mal-invested capital is in a particular form - such as a BMW - which can only be turned into a more productive form - say, cattle - at great loss.

It is this underlying destruction of capital, on a vast scale, that is the real cause of the recession.

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About the Author

Justin Jefferson is an Australian who wishes to show that social co-operation is best and fairest when based in respect for individual freedom.

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All articles by Justin Jefferson

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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